Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
To control inflation by limiting the amount of money banks can lend
B
To increase the profitability of commercial banks
C
To encourage banks to invest in government securities
D
To allow banks to operate without any oversight
Understanding the Answer
Let's break down why this is correct
Answer
The primary purpose of reserve requirements set by central banks is to ensure that banks keep a certain amount of money on hand to meet customer withdrawals and financial stability. This means that banks cannot lend out all the money they receive from deposits; they must hold a portion in reserve. By doing this, central banks help prevent bank runs, where too many people try to withdraw their money at once, which could lead to a bank failing. For example, if a bank has a reserve requirement of 10%, and it receives $1,000 in deposits, it must keep $100 in reserve and can lend out $900. This system helps control the overall money supply in the economy and keeps the banking system safer.
Detailed Explanation
Reserve requirements help control inflation. Other options are incorrect because Some might think reserve requirements are meant to make banks more profitable; It's a common idea that reserve requirements encourage banks to invest in government securities.
Key Concepts
required reserves
Topic
Reserve Requirements and Money Creation
Difficulty
easy level question
Cognitive Level
understand
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